ISDA and AFME Push for Liquidity Safeguards in EU ETS Review

ISDA and the Association for Financial Markets in Europe (AFME) submitted a joint statement to the European Commission on November 2, responding to the Commission's call for feedback on the review of the EU Emissions Trading System (ETS). The two industry bodies framed their response around a single premise: compliance entities can only manage carbon price risk if the ETS remains a deep and liquid market.

The submission arrives as the Commission works through its review of the EU's flagship carbon pricing instrument, which obliges emitters to surrender allowances covering their verified emissions. The design of that market directly affects hedging costs and execution choices for utilities, industrial emitters and the financial firms that provide liquidity to them.

What does the response ask for?

The joint statement sets out four main positions:

• A predictable, market-based framework. ISDA and AFME argue that regulatory stability in the ETS allows compliance entities to plan their hedging programs and price carbon risk into investment decisions over multi-year horizons.
• Deep, liquid markets. The response stresses that liquidity is the precondition for compliance entities to manage carbon price risk effectively — a point the associations tie to the participation of a broad range of market users.
• No new barriers for financial intermediaries. The statement cautions against measures that would restrict the participation of financial firms in the ETS. Banks and other intermediaries act as liquidity providers in the allowance market; limiting their access, the argument runs, would thin the market and raise hedging costs for the compliance side.
• An early timeline for linking the EU and UK systems. The associations call for a prompt schedule for connecting the EU ETS with the UK ETS, which has operated separately since the UK left the EU scheme. A link would widen the pool of participants and harmonize carbon pricing across the two jurisdictions.

How does the response treat private capital?

Beyond market design, the joint statement sets out recommendations on mobilizing private capital for industrial decarbonization. The associations position financial markets as a channel through which investment can flow into emissions-reduction projects at industrial installations covered by the ETS. The response does not specify individual instruments or amounts; it frames the recommendations as conditions under which private capital would participate at scale.

What is mandated and what is proposed?

Nothing in the joint statement carries regulatory force. It is a consultation response, not a rule. The European Commission's call for feedback is itself an input-gathering step in the ETS review, and the November 2 submission is one of the responses the Commission will weigh as it drafts any legislative changes. Which of the associations' positions survive into a Commission proposal — and on what timeline — remains open.

For desks active in carbon markets, the stakes are concrete. Any restriction on financial intermediary participation would change who provides liquidity in EU allowance futures and options, and at what spread. A firm timeline for an EU–UK link would alter cross-border hedging flows and the relative pricing of EU and UK allowances. Both outcomes sit in the execution-cost column for compliance entities.

The Commission has not yet indicated when it will publish conclusions from the feedback round or a legislative proposal, so market participants will watch the next stage of the ETS review for signs of whether the associations' liquidity arguments have landed.